Want to be a better investor? It’s (almost) all in the mind.

But long before behavioural finance became a fancy term in the worlds of academia and finance, economists and fund managers Bailard, Biehl and Kaiser proposed their own ‘five-way model’ in 1986, defining distinct investor profiles based on their level of confidence and their actions.

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They divided investors into five categories: celebrity, adventurer, individualist, guardian and straight arrow. Let’s understand them one by one. 

• Adventurer: These investors are spontaneous and confident. They typically have huge conviction on their “gut feeling” and act on it quickly. They are generally risk-takers and have some knowledge about the subject matter.
• Celebrity: These are the investors who act impulsively with limited knowledge. If you ask a wealth manager, these are the toughest investors to handle. Along with limited knowledge, they suffer from an overwhelming urge to be in the thick of things. 
• Individualist: Maybe the way to define them is ‘calculated risk takers’. High on confidence and with moderate knowledge, these people take very careful and calculated decisions. 
• Guardian: The most conservative investor of all, the guardian wants either slow and stable growth or just to preserve his capital. He has a high dependence on money, which makes him very cautious when making decisions, sometimes to the level of being indecisive or status quo-ist.
• Straight arrow: The most balanced of them all, this investor is neither reckless nor slow in making decisions.His confidence level is also moderate and not on the extreme side.

While this framework has its constraints, it gives us an opportunity to introspect on our behaviour as an investor. According to me, every investor should look at the following aspects:

• Decision-making: Probably one of the most underrated traits of successful people, a moderate pace and holistic method of decision-making helps us to not only avoid pitfalls but also ensure our decisions are in sync with our risk profile and financial objectives.
• Knowledge level: The more I read, the more I learn how little I know. There is nothing like a “high” level of knowledge. Thanks to human limitations, we each know a minuscule part of what’s out there. In an ideal world our confidence would be in proportion to our level of knowledge. In other words, it’s important to introspect on whether your level of confidence is backed by your level of knowledge.
• Confidence level: Like any other trait, having a balance is important. While overconfidence can result in reckless and hence poor decisions, under-confidence leads to slow decisions or no decisions at all.
• Ability to tune out noise: A celebrity investor’s urge to be in the thick of things ensures that he ends up making poor decisions. As in all domains of life, investments come with a lot of noise. The ability to not be guided by this noise and make decisions based help us avoid making a lot of bad decisions. 

Our quest for an optimised portfolio is always a function of how we approach investing. In today’s world, access to information and data is becoming easier day by day. In such a world, it should be easier for a person with an analytical bent of mind and a holistic decision-making process to generate higher-than-average returns. But that’s not always the case. 

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So while the contribution of knowledge is well acknowledged in managing portfolios, the contribution of a person’s emotional quotient is seldom acknowledged. While there is no recognised process for increasing one’s emotional quotient, we can certainly try to be better at managing our emotions when it comes to our portfolio. To do this you need to analyse your decision-making process regularly, see what mistakes you have made, and ask yourself how you can avoid these in future. After all, learning is a lifelong process. 

Ankit Garg is co-founder of Wealthy Nivesh, mutual fund distributor registered with the Association of Mutual Funds in India.

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